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Ford Says Rise in Rates May Improve Balance Sheet

Favorable impact on automaker’s pension shortfall would offset the higher cost of funds.

Ford Motor Co., now ranked as investment grade by all major credit-ratings companies, said a gradual rise in interest rates would boost its balance sheet and help offset the higher costs to finance car sales.

Rising interest rates are having a “hugely favorable effect” on Ford’s pension obligations, Chief Financial Officer Bob Shanks said today in an interview. Shoring up the pension shortfall, which ratings companies treat as debt, would blunt the impact of higher costs of funds for Ford Motor Credit, the Dearborn, Michigan-based company’s lending unit.

“On the assumption that it’s sort of a progressive increase to normalized rates, consistent with an improving economy, I think we’ll be fine,” Shanks said in Bloomberg’s Detroit bureau. “Overall, that’s good news for the company.”

Standard & Poor’s Ratings Services delivered an endorsement of Detroit automakers’ rapid recoveries this month by raising Ford to investment grade and revising General Motors Co.’s outlook to positive. As interest rates rise, the costs today of automakers’ future pension obligations decline, which should allow more spending on their auto operations.

For the last several years, GM and Ford could at least in part blame Treasury yields, a benchmark in their pension calculations, for widening pension shortfalls. Yields plunged after the 2008 financial crisis as the Federal Reserve embarked on unprecedented bond-purchase programs to lower borrowing costs and encourage spending.

Interest rates have risen since Federal Reserve Chairman Ben S. Bernanke said the central bank may reduce its asset purchases this year and stop in the middle of 2014 if economic growth meets policy makers’ projections.

“Our expectation is that we’ll see a return to more normal interest rates progressively over time,” Shanks, 60, said in a separate Bloomberg Television interview. “It’s a sign of a growing, improving economy. There are parts of the business that will be under some pressure because of that, but there are other parts of the business that will benefit.”

Ford’s pension plans were underfunded by $18.7 billion at the end of last year. Only Detroit-based GM, with a shortfall of $27.8 billion, General Electric Co. and Boeing Co. had bigger shortfalls, according to data compiled by Bloomberg.

The costs of funds for Ford Credit will be higher “at some point” as interest rates rise, Shanks said, which eventually would make it more expensive for vehicle buyers to finance their purchases.

Fed’s Intent

“That would be something that would raise the cost of vehicles if they’re financed by customers,” the Ford finance chief said. Rising rates could also affect “what types of vehicles they think they can afford or pay for and overall volume,” he said.

The key will be how quickly rates rise, Shanks said. The central bank has signaled such a move would be gradual, he said.

“They’ve tried to be very good in terms of being very transparent around what’s going to happen,” Shanks said. The central bank “does have to pull back and get its own balance sheet in shape. It may not be perfectly smooth, but as long as it’s somewhat smooth and progressive and they continue to do such a good job of communicating what their thoughts are around that and their plans, I think we’ll be fine.”

Janet Yellen, the current Federal Reserve vice chairman, is “eminently qualified” to replace Bernanke as the next Fed chairman, Shanks said. Yellen, 67, has been among the candidates mentioned by President Barack Obama as possible replacements for Bernanke, 59. Former Treasury Secretary Lawrence Summers yesterday withdrew from consideration to be next chairman.

Ford was unchanged at $17.35 at the close in New York. The shares have surged 34 percent this year, compared with a 19 percent gain for the Standard & Poor’s 500 Index.

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